SEC Approves In-Kind Creation and Redemption for Bitcoin and Ethereum ETFs

The U.S. Securities and Exchange Commission (SEC) has approved a significant change to the operations of spot Bitcoin and Ethereum exchange-traded funds (ETFs). The key modification permits in-kind creation and redemption. This means authorized participants (typically large institutional investors and banks) can exchange ETF shares for the underlying assets (Bitcoin or Ethereum) instead of receiving cash.

This approval, long-awaited by issuers and market participants, is expected to enhance the efficiency and lower the operating costs of Bitcoin and Ethereum ETFs, aligning them more closely with traditional physical commodity ETFs like those tracking gold.

Previously, the redemption process involved authorized participants submitting baskets of ETF shares, which the issuer would then convert to cash to return to them. Now, effective in-kind transactions allow the true transfer of Bitcoin or Ethereum.

“It’s a new day at the SEC. A key priority of my chairmanship is developing a fit-for-purpose regulatory framework for crypto asset markets. Investors will benefit from these approvals, as they will make these products less costly and more efficient,” stated SEC Chairman Paul S. Atkins.

“In-kind creation and redemption provide flexibility and cost savings to ETP issuers, authorized participants, and investors, resulting in a more efficient market,” noted Jamie Selway, Director of the SEC’s Division of Trading and Markets.

The change eliminates a major operational hurdle. Under the prior cash-only model, authorized participants faced complexities and costs in buying or selling large amounts of Bitcoin or Ethereum to satisfy redemption requests.

“This is huge. And this will create an explosion of option-based Bitcoin ETFs,” Bloomberg analyst Eric Balchunas commented via tweet.

Analysts welcomed the move, with James Seyffart adding, “more movement in the right direction.” The decision underscores the view among industry insiders that Bitcoin and Ethereum ETFs should be treated similarly to their physical commodity counterparts.

“It’s a new day at the SEC,” echoed ETF industry veteran Nate Geraci, referencing Chairman Atkins’ commitment to establishing a clear regulatory path for digital assets while supporting innovation.

The SEC’s approval extends beyond in-kind redemption. Other concurrent changes aim to facilitate greater institutional involvement:

• Increased Position Limits: The SEC raised the position limit for Bitcoin ETF options from 25,000 to 250,000 contracts.
• New Options Products: Listed and FLEX (customizable) options were approved on several Bitcoin and Ethereum-based ETFs.
• Mixed Digital Asset ETFs: The approval now includes funds combining Bitcoin and Ethereum.

This represents a substantial first step from the SEC under the leadership of Chairman Paul Atkins, a former commissioner known for a generally accommodative market stance. He has pledged to foster a regulatory framework that supports innovation while safeguarding investor interests.